U.S. economic growth is likely to be sluggish in 2008, dragged down by an ailing housing sector that is not likely to recover in the near future, said head of the San Francisco Fed Janet Yellen (non-voter) on Thursday evening. However, the Fed will continue to act in a "firm and timely manner" to address the situation, she promised.

"Economic prospects remain unusually uncertain, and the downside risks to growth are significant," she said. "Going forward, the Committee must carefully monitor and assess the effects of ongoing financial and economic developments on the outlook for output and inflation, and be prepared to act in a timely manner to promote a return of the economy to a sustainable path."

Yellen also said inflation would moderate over the next few years, and although recent data on price developments had been disappointing, the downside risks to growth are rising.

During the Q&A that followed, Yellen said the Fed's rate cuts had probably helped ease pressures on the housing sector, and that the credit crunch would have been much worse if the Fed hadn't intervened. She also promised the Fed had plenty of tools in its arsenal should the situation change.

She also said regulation of investment banks was something which should be seriously considered.

Previous market commentary suggests Yellen is dovish on growth.

By Erik Kevin Franco, edited by Cristina Markham